Investment continues to flow into Latin America to develop new mines

Investment continues to flow into Latin America to develop new mines despite some weakness in commodity prices. For example, Silver Wheaton, a Canadian firm, plans to invest in significant production growth over the next five years. Mining companies and investors also continue to develop copper mines in the region, with Peru as the new hotbed.

Global supply has steadily increased for most commodities over the past ten years. While each commodity is somewhat different, generally increasing demand, largely from emerging economies, outpaced supply growth for much of this time. That led to high prices and big capital expenditure plans from the miners like Vale, BHP and Rio Tinto. The global downturn allowed supply to overtake demand, but again, emerging economies were able to absorb the increase in supply. Now, generally there is enough global supply and capex plans have slowed to incorporate slower growth in demand levels. However, Latin America is received much of the new investment dollars and additional opportunities exist.

Silver Wheaton Expanding in the Region

Silver Wheaton plans to increase silver production by 34% by 2018 at its mines. Two of its mines, San Dimas and Penasquito, associated with Primero Mining and Goldcorp, respectively, are both part of Silver Wheaton’s growth plans. Both of these are in Mexico, a country that has made investment in mining somewhat less attractive through the introduction of a 7.5% royalty and 1% revenue tax on operations there. Last week, we discussed how tax initiatives in Mexico would potentially shift investment plans in Mexico elsewhere in the region.
In Peru and Brazil, Silver Wheaton will start operating its $1.55 billion Constancia project. This mine will also produce gold and silver. Other plans include growth at the Salbo mine in Brazil, which is operated by Vale.

Largest Undiscovered Copper Reserves

South America holds the largest amount of undiscovered copper reserves according to a recent report from the US Geological Survey. It is estimated the region holds 20% of undiscovered global supply. It already holds the world’s largest copper mines, one of which is Escondida owned by BHP. Escondida is located in Chile, accounts for 5% of annual global supply and is so large it is viewable by the naked eye from outer space. South America potentially has another 750Mt of undiscovered copper reserves, Central America is estimated to have another 170Mt.
Along these lines, there are plans for five new copper mines in Peru with investment totaling $13 billion. Production is planned to start by 2016. It will result in an increase in production from Peru from 1.3 Mt to 2.8Mt per year. The largest projects is operated by Freeport McMoRan where investment totals $5.2 billion. In total, copper capex plans globally will add 1.1 Mt to 1.3 Mt per year through 2016. Peru is an important component and accounts for almost a third of planned new global supply by 2016.

Prices are a Potential Headwind

Plans have remained in place despite soft prices, but there is a risk to investment if commodity prices remain weak, particularly copper. Prices are down 13% this year already and are still showing signs of weakness. However, the ongoing rebound in the US housing market and improving conditions in Europe should support prices. The biggest threat would come from a collapse or substantial weakening of the Chinese economy.

Conclusion

Investment should continue to flow into mining in Latin America. While policies we discussed in Mexico could negatively impact investment there, policies in Peru are creating a much more ripe investment environment. We also discussed this in an earlier article. Global prices will impact investment on the margins, but current commodity prices exceed production costs by a wide enough margin that investment should continue in the region.